How should investors read tariff deals and deadlines?

How will the fast-evolving tariff landscape impact economies and global financial markets? We have modestly reduced portfolio risk in light of an expected slowdown, but still see recession risks as contained. We retain a balanced investment strategy, anchored in assets and regions well positioned to navigate a period of trade-driven uncertainty.

Financial markets have largely shrugged off tariff uncertainties ahead of an 1 August deadline, with many equity indices reaching new highs. Recent trade agreements between the US and Japan and the US and European Union have maintained investors’ enthusiasm. While we see reasons for well calibrated risk taking, we anticipate a meaningful global economic slowdown and market re-assessment of risks, given an effective US tariff rate that is significantly higher than at any time since the late 1930s.

Uncertainty will not end on 1 August

A combination of deals and punitive tariffs have preceded the August deadline. While some countries may still reach preferential trade agreements, others could face temporarily more punitive tariffs. Even the deals agreed in principle so far will likely require further negotiations, involving ongoing uncertainty for some businesses.

A shock to global trade is unfolding. The first Trump administration oversaw an increase of around 1.5% in the US average effective tariff rate. Today, based on the latest deals, we are looking at an increase of around 15% on a trade weighted basis. In contrast to trade frictions during President Trump’s first mandate, foreign exporters are now partially absorbing some of these tariff increases, currently around 10% on average, based on import prices. However, while this can offset some of the impact of increasing tariffs on the US economy, the burden of paying the bulk of duties still mainly falls on US importers. The implications of such an increase in duties should therefore not be underestimated.

The evolving tariff landscape will induce a meaningful slowdown of the global economy, albeit not a recession

Our forecasts indicate that the evolving tariff landscape will induce a meaningful slowdown of the global economy, albeit not a recession. We see US growth in 2025 at only half its potential, with tariff impacts becoming clearer in the last six months of the year.

The impact on US inflation has been mild so far, consistent with businesses building inventories in anticipation of the trade shock. However, while services and housing inflation have remained moderate, in line with our forecasts, in June we started to see core goods inflation rising in areas affected by tariffs, including household furnishings and recreational goods, such as toys.

We see US core personal consumption expenditure (PCE) inflation – the measure most closely watched by the Federal Reserve – peaking at 3.4% around year-end. Given the uncertainty involved around the speed of transmission of higher input costs to consumer prices, we are closely monitoring data scraped from some US retailers’ websites in real-time.

Which economies will be most affected?

Mexico, Canada, Taiwan and Switzerland are among the countries most exposed to US import tariffs, though for the first two, their exposure is greatly limited by exemption from tariffs covered under the 2020 US-Mexico-Canada Agreement (USMCA). Switzerland has not yet received a tariff notice letter, leading us to expect that a general 10% rate will apply until an agreement is signed, which must address duties on the pharmaceutical sector. We therefore retain our Swiss GDP growth forecast of 0.7% for 2025. For Mexico, Canada and Taiwan, our forecasts are -0.7%, 1.4% and 3.3% respectively.

The 15% tariff under the US-EU deal also covers pharmaceuticals, thus creating a potentially positive signal for the sector in Switzerland

European countries tend to trade more between themselves, and their economic exposure to the US is more contained. For Germany and Italy, exports to the US are worth around 3% of GDP, while for Spain the figure is closer to 1%. Under the deal signed by the US and EU, European goods face a broad 15% baseline tariff, rather than a threatened 30%. In addition, the EU has committed to buy USD 750 billion of US energy over three years, and invest an additional USD 600 billion in the US. Importantly, the 15% tariff rate on EU exports to the US will apply also to automobiles and parts, currently facing a rate of 27.5%. For Germany, with its heavy exposure to the car sector, this is not a terribly bad deal. Other countries, such as Spain, are more exposed to tariffs on agricultural goods, an area that is still subject to some negotiations on exemptions from the baseline rate. The 15% tariff under the US-EU deal also covers pharmaceuticals, thus creating a potentially positive signal for the sector in Switzerland.

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Preference for emerging market equities, investment grade bonds

To date, equity volatility has remained subdued, with the VIX index reading 15.2, versus a historic average nearer to 20. We believe volatility will increase over the coming weeks and into the third quarter. The equity indices most exposed to revenues from the US are the Swiss, UK, German and French indices followed by Japan and Europe.

We still see a reasonably good backdrop for equities but second quarter results so far have been mixed, with earnings revisions for the full year either flat or down, while investor sentiment looks extended and the market rally since 2 April has been very fast. We took profits on developed market equities earlier in July, but retain an overweight allocation to emerging market equities, where valuations are lower and earnings growth looks stronger. Our favoured markets here are India and South Korea. We also note that any resolution of the treatment of pharmaceutical tariffs could see the Swiss Market Index recover some ground, after lagging other markets this year.

We still see a reasonably good backdrop for equities but second quarter results so far have been mixed

In fixed income, we believe investment grade corporate bonds still offer opportunities. Sovereign bonds may be negatively impacted by prohibitive US tariffs coming into effect if they imply more government spending to support struggling economies. In Europe, Germany has the required fiscal headroom to react, but countries like France or Italy have less scope and their credit spreads to German Bunds might widen.

In currencies, the scale of relative economic damage from tariffs and changes to implied interest rate trajectories could sustain volatility. We see the EURUSD currency pair in a fair value range of 1.15-1.20. For the Swiss franc, a successful deal with the US would consolidate USDCHF around current levels as we still see the Federal Reserve cutting its rates and the Swiss National Bank has reached a floor of 0%. For USDJPY, the recent Japan-US trade agreement should clear the way for a stronger yen.

We also see a role for gold in building portfolio resilience, and as an important risk management tool in the current uncertain environment. After dialling back gold exposure during the 90 day tariff pause, we raised our holdings back to neutral earlier this month.